Steel jobs on the line amid cuts in capacity

Beijing's bid to streamline metal production puts it in conflict with local governments that are reluctant to oversee mass unemployment

PUBLISHED : Monday, 30 September, 2013, 12:00am
UPDATED : Monday, 30 September, 2013, 4:00am

Zhang Fei sums up one of the headaches for Premier Li Keqiang in his efforts to refocus the mainland's economy.

The contractor, who earns 160 yuan (HK$202) for four hours work at a steel mill, is leaning on his red motorcycle in grimy army fatigues and battered running shoes on Galaxy Street. That is a 15-kilometre strip lined with forges, welders, tyre-repair, and car-painting shops, as well as restaurants, a school and a hospital.

After a decade of failed efforts to cut outdated commodity capacity on the mainland, investment bank Goldman Sachs says Li is getting serious, driven by the need to reduce severe pollution.

Zhang and thousands like him on Galaxy Street live off servicing mills in Tangshan, the largest steel city in China that alone has almost five times as many blast furnaces as North America.

"If you shut these plants, we'll all lose our jobs," said Zhang. "If there's no steel industry, we would have a hard time finding other work."

Li's push is mirrored in heavy industries across China, the world's top steel producer and exporter, with the government in July ordering more than 1,400 companies in 19 industries to reduce capacity, targeting steel, ferro-alloys, aluminium, and copper smelting.

Cities like Tangshan, in Hebei province, are marked for cuts. The United States, Canada and Mexico combined have 32 operating blast furnaces for making steel, according to the Association for Iron & Steel Technology. Tangshan alone has 156.

Eliminating capacity means winning over regional governments reluctant to crack down on industries that provide tax income. Mass unemployment brings other concerns.

"That's always been one of the biggest hurdles of China taking curtailment actions. It's the job losses and potential social unrest," said Vanessa Lau, a senior analyst at Sanford C. Bernstein in Hong Kong. "For local governments, unless you really force them, they'd rather not."

Previous attempts to streamline the steel industry have stumbled. In 2009, the government scrapped the takeover of Linzhou Iron & Steel after workers held an official hostage for four days. The same year, workers at Tonghua Iron & Steel killed an executive who demanded job cuts as part of a takeover of the company. The buyout was abandoned.

Meanwhile, steelmakers boosted capacity and hired more staff, employing about 3.2 million workers in 2011, about 10 per cent more than in 2006, according to a Bernstein report that cited the National Bureau of Statistics, among others.

The mainland added 440 million tonnes of capacity in the past six years, bringing the total to 976 million tonnes, broking house UOB Kay Hian said last month in a report, citing data from the China Iron and Steel Association. An additional 130 million tonnes will be added in the three years to 2015.

As the industry expands, the state is taking out the scalpel. The five-year plan to 2015 orders the shutdown of blast furnaces smaller than 400 cubic metres. Steelmakers are required to cut carbon-dioxide emissions and energy use by 18 per cent and to consolidate the top 10 producers.

"The local government and the central government are really stepping up efforts to shut down all this less-efficient, highly polluting capacity," said Goldman analyst Julian Zhu. "Over the next three years, we believe the overall capacity to be closed is going to be much bigger compared to the last 10 years."

Tangshan produces half the steel from Hebei, the mainland's biggest steel producing region that accounts for about 20 per cent of capacity.

Policymakers plan to cut 60 million tonnes of capacity there by 2017.

"Every company will need to improve to comply with the government's requirement, otherwise it won't be able to exist," said Shi Shaohui, a director of company culture and media relations at Tangshan Iron & Steel.

The 70-year-old company, which has 37,000 employees and is the main unit of Hebei Iron & Steel, the mainland's biggest mill, has been told to shut three iron ore processing machines.

"We will no longer add more capacity but will instead seek to produce higher-valued products," said Shi. "China's emphasis on the environment is also improving."

Seven of the 10 cities with the worst air pollution on the mainland in the first half were located in Hebei, including Tangshan, according to the Ministry of Environmental Protection.

Pollution in the largest cities was three times worse than levels advised by the World Health Organisation, the agency said.

"The main problem is dust," said Chen Junsheng, a retired porcelain factory worker, who lives in a village community near a steel plant in Tangshan.

Large trucks carrying steel slag and sand under tarpaulins rumble up and down the black-grime covered streets.

"You can't leave the windows open at night," Chen said.

By next year, a year earlier than planned, the government will complete its capacity-reduction plan for the five years to 2015, and will seek further cuts, according to industry minister Miao Wei.

On Galaxy Street, Zhang sees a challenge for Premier Li.

"I don't think much difference can be made without the government making a firmer determination," he said. "These local officials won't do anything ordered by the central government."